How is the Russia-Ukraine war changing the diamond industry?

Emma Clarkson Webb, guest contributor

What part does Russia play in the diamond industry? 

In 2021, Russia’s Alrosa mine had an output of 32.4 million carats, making it, by some margin, the world’s largest single rough diamond producer accounting for 29% of global output. Alrosa’s 2021 revenue was approximately $4 billion, second only to De Beers in the top line value it generates for shareholders.  

But when it comes to shareholders, the ethical elephant in the room is that the Russian state owns a 33% stake in Alrosa, so arguably any sales it makes could help fund Putin’s Special Military Operation. The stones it produced for so many years can henceforth no longer be claimed as ethically sourced. Or can they? This is the debate, or rather the problem, that has plagued the industry since Russian tanks first rolled over the Ukrainian border just over a year ago. 

Has the war affected the diamond market? 

There is a long-standing debate over the definition of diamonds as a commodity. Like gold, they are a store of wealth and inflation hedge, but unlike precious metals, diamond quality varies wildly. Cut, Clarity, Colour and Carat weight (The four C’s) are all factors, making price discovery extremely difficult and therefore harder to define as commoditised. Interestingly, the result is that diamond prices are surprisingly uncorrelated to gold. Irrespective, the industry felt the impact of the war in 2022 as trading slowed along with the inevitable economic uncertainty. Polished diamond prices peaked a week after the invasion but, surprisingly, have since been on a downward trend. But the word on Hatton Garden’s street is that the industry has yet to feel the effect of Russia’s war. 

Experts around the world predicted a global supply shortage of both luxury goods and commodities alike, but supply chains soon fell into line and despite Alrosa being theoretically offline, diamonds were no different. As with the USA and its oil, the big diamond outfits keep vast reserves to avoid supply and price fluctuations, and it will take time for those reserves to shake out into the market. Russia itself has (or had) the largest reserves, with an estimated 600million carats of above ground stones at the start of the war. 

In addition, the industry is still adjusting to the US sanctions placed on Alrosa, placing it on the sanctions list that bans businesses from extending credit to the Russian mining company. Essentially this doesn’t impose the harsher sanctions of an asset freeze or prevent all commerce, but it does make buying rough stones from the Alrosa mine more difficult since Russian banks have been cut off from the global SWIFT system. Let’s be clear, actually cutting off the Russian supply could create further shortages which would ultimately support a sharp reactionary rise in diamond prices, one that could well be sustained. 

The sanctions placed on Russia’s mines do have loopholes and are being revised - they restricted direct imports from Russia but allowed orders of diamonds sourced in Russia which were then polished in other centres. In addition, some countries didn’t impose any sanctions, including Belgium, the largest pre-war trading centre of Alrosa diamonds, India, which cuts and polishes Alrosa stones, and Dubai which facilitates the trade to India. As a result, Russian diamonds still have a path to market, it is elaborate but where there’s a will, there’s a way.  

 Three areas of the trade affected:

  • A slowdown in demand as the war fuels global economic uncertainty.

  • A decline in the rough-diamond supply due to the US sanctions on Alrosa.

  • A bifurcated buyers’ market – those that ethically source diamonds and those that don’t.

We think that the biggest issue will be how the sanctions on Alrosa will affect supply and push the market towards showcasing its responsible sourcing credentials. Russian diamonds are clearly entering the market and Alrosa appears active. The challenge is for dealers and manufacturers to ensure that Russian and non-Russian diamonds don’t mix in the trading, cutting and polishing stages. Can the trade provide jewellers the assurance they need that their stock is not from a banned source, that they aren’t invertedly supporting Putin’s lunacy? 

Anyone who’s seen Blood Diamond knows that this is not the first time the industry has faced this challenge, but the industry’s resolve to exclude Alrosa stones must match the resolve of those that benefit from them entering the market. Out of necessity to fund their war, Alrosa’s supply will likely increase this year and the trade and industry will need to decide how best to identify and disclose the true origin of these stones. 

Steps are being taken, Belgium is apparently working to introduce a secure traceability system for diamonds, assuring that the Russian rough doesn’t filter through already cut and polished. Russia’s old enemies, Europe and North America, together represent 70% of the world trade for natural diamonds, so it would seem natural for them to escalate their restriction of Alrosa diamonds in lockstep with their escalation of weapons provision to Ukraine. 

As a bespoke jeweller specialising in sourcing diamonds from across the globe to create engagement rings and celebration jewels, we, at Emma Clarkson Webb, are wholly committed to responsibly sourcing diamonds, not those from Russia! 

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